Pai backs founders, says Infosys 'destroying shareholder value'

Amid the differences between the founders and the board of Infosys, the likes of NR Narayana Murthy, Kris Gopalakrishnan and Nandan Nilekani have got support from a different quarter. Former Infosys board member T V Mohandas Pai came down strongly on the board and sought detailed answers from the board regarding concerns over corporate governance and CEO Vishal Sikka's compensation.Pai said the board should not take shelter under "bland" statement that the decisions were taken in the interest of the company.CNBC-TV18 was the first to report that Infosys founders had written to the country's second-largest IT company's board to express concerns over pay hike given to CEO Vishal Sikka along with package offered as severance to two former senior executives CFO Rajiv Bansal and General counsel David Kennedy.Speaking to CNBC-TV18, Pai said that investors are expecting earnings per share (EPS) growth of 10-13 percent. He said that the gap between expectations and actual rollout is hammering the stock downwards.According to Pai, Infosys is giving a return as low as 5-6 percent even after sitting on surplus cash. Pai said this is corroding shareholder value. He added that the time is right for Infosys to start looking for buybacks and increase earnings per share (EPS) using the surplus cash.Pai said the board must be held accountable for decisions taken and that the board members are not owners of the company.Referring to ex-CFO Rajiv Bansal's severance package of Rs 17.38 crore, Pai said "The founders who have built the company and created a value system have raised serious issues. As far as I know, no CFO in India has got a 24-month pay in separation," he told PTI earlier in the day.He told PTI that, "And (earlier) CFOs have left the company and they have not got any separation. There is no case for a special treatment for anybody. And the management cannot be generous with shareholder money because it’s not their money. It’s a serious lapse which should be looked into by the board."Below is the transcript of Mohandas Pai’s interview to Shereen Bhan on CNBC-TV18.Q: Why do you believe that this is a good time for companies like Tata Consultancy Services (TCS), Wipro, Infosys, etc. to consider the buyback option? How would that create value for shareholders?A: I believe that big companies like Infosys, Wipro or TCS or Cognizant or HCL Technologies, they have something like USD 16 billion of cash sitting on their balance between them. They could grow at 7-9 percent. 7-9 percent is very good because the Organisation for Economic Co-operation and Development (OECD) growth rate in Europe and America is only 3 percent. So, if you grow at 2-3 times the economy growth rate, that is very good, but investors expect increase in earnings per share (EPS) by maybe 10-13 percent and that is an expectation gap that is hammering the stock price.If you look at Accenture over the last five years, Accenture has been buying back stock to the extent of 3-4 percent, they are paying dividend to the extent of 3-4 percent and their EPS has been growing up by maybe 9-10 percent and the shareholders are very happy, the stock price have doubled. Now, these companies are sitting on large amounts of cash and they are giving stories to all of us as investors that they need the cash. I was the CFO, I gave a similar story but we had a model. Now I do not know what the model is because clearly they are sitting on excess cash. The return on the cash is only 6-7 percent. They are earning 20-25 percent on equity, that means they are destroying shareholder value.It is time they bridge the gap between the expectation of shareholders of increase in EPS by 10-13 percent because they got surplus cash and their actual earning could be 7-9 percent at best and make sure that investors get a good deal. What do they get by keeping cash on the balance sheet? Infosys’ market value is Rs 2,11,000 crore. They got Rs 40,000 crore, they got 20 percent. They could use 10 percent to buy back stocks and EPS could go up 10 percent.TCS has got Rs 4,35,000 crore, they have Rs 40-45 percent, they could use 5 percent of that and increase the EPS. They must give the cash back. They do not need the cash because they have got cash surpluses. They do not need the cash because they generate huge amounts of cash to the extent of 18-20 percent of the total revenues and they are all service companies, they do not require investment, they have not made any large blockbuster acquisitions and if they make acquisitions by giving cash, it will be a very silly thing to do because shareholders will not share the risk.What do you get for making an acquisition of a service company except larger market share and greater trouble? We seen when Electronic Data Systems (EDS) was acquired by HP, you know what happened to HP? It almost went kaput. So, large acquisitions do not make any sense any more. So, I would think time has come for them to do what is called capital location.Elliott Capital wrote a wonderful letter to Cognizant saying that you are earning only 19 percent margin which you are talking for the last many years which is less than what others are earning. So, you must hurry up and become efficient. You have got some USD 3-4 billion of cash and you must give it back and change the board and improve your practice. Become more aggressive. 19 percent margin is not enough. You say you are the best company but you are earning 19 percent. TCS and Infosys is earning much more, so you can earn much more. That means you are inefficient and your per capital income is something which has remained constant for long. They called the bluff and now, they announced that USD 1.5 billion of buyback is being done by Cognizant.Likewise, the time has come for Infosys and TCS and the boards of this companies to look at the huge cash generation. The dividend policy is pretty good, 40-50 percent of profits, but the balance 40-50 percent is not required, they have cash short, buy it back and make sure you have a proper capital allocation every year for the next 5 years to make sure EPS goes up in double digits and investors are happy. Today, all institutional investors are very unhappy about the boards, they seem to be paralysed and unable to take decisions. Capital allocations for large companies throwing up cash is the normal activity.When V Balakrishnan and I wrote to the company in 2014, the company rubbished us which is very sad, by saying, some shareholders have written this, the board will come back. The board never wrote to us. In any US company, if investors write to the board, the board comes back and gives logic. They tell you why they are doing, what they are doing and what they are going to be focused on creating shareholder value. In the case of Infosys, from April, 2011 till today, the market value has not gone up much. For five years, the market value has not gone up at all. So, the board should be held accountable for not creating enough shareholder value by giving good returns to shareholders for the last five years.Yes, it went through a churn, it went through a change of management, we know all that, but that does not absolve the board of looking at proper capital allocation, use of surplus cash in the balance sheet and telling shareholders. Today, our interest is as shareholders. So, to that extent, I am very happy that the founders of the company who are major shareholders holding 12-13 percent has sent a letter to the board asking for better governance practices, shareholders have to put pressure on the boards to act as fiduciary agents. The boards are not owners of companies, they are fiduciary agents. They must make sure shareholders get good returns, not sit on cash and not take any decisions. So, the time is very right.Q: Since you brought up the story that CNBC-TV18 broke on the Infosys founders writing to the board of Infosys raising certain concerns. Let me ask you how you read the current situation because we are given to understand that there are differences of opinion on several matters from severance packages given to the former CFO and the former General Counsel to compensation issues linked to Vishal Sikka and perhaps some of the other issues that you perhaps talked about, capital deployment and so on and so forth. People are drawing parallels between what has happened at the house of Tatas and what seems to now be unfolding here. Would that be a fair parallel or a fair analogy to draw and where do you see this headed?A: The Tatas said that the values of the Tata House is not being followed by management and as majority owners of Tata Sons, they have a right. The only question was how they dealt with the Chairman. It should not have been so sudden. It should have been more nicely done. That is the only dispute I have. And here in this case, the founders and shareholders, as people who build the company, people who sacrifice much, who had a great value system are saying that the board has not come up to the high standard they expect in corporate governance and many issues, especially in what was paid to the former CFO and the compensation issues.On the CFO, I agree because tell me who has been paid 24 months compensation for any CFO, any management in India in all these years? I do not know anybody. I have not been paid and I probably knew more secrets than anybody else. Bala has not been paid, he knew more secrets. Ashok Vemuri has not been paid, BG Srinivas has not been paid and all of us knew more secrets than anybody else. We have not been paid, why this special treatment? And was the special treatment done just to pacify somebody or you wanted to get rid of somebody, we do not know.The board owes an explanation. The Chairman came to the shareholders’ meeting and said the CFO has some secrets and he may go away, but those are all bogus claims because all of us had secrets, we all knew about it. Why 24 months and why did it happen? They have not given a proper explanation. It is good for the founders to write and ask for the explanation because it goes against the value system of the company. Infosys is no ordinary company. it is the company in terms of values and corporate governance in India and it is extremely important.The next point is about the CEO. The CEO’s compensation should be tied to performance, it should be tied to the commitment of 20 billion and 30 percent and it should be tied to shareholder value creation. Shareholders have not benefitted in the last five years.Q: But it has been.A: No, I know it has been, but the absolute quantum of the compensation is very high compared to any standards. Look at TCS. TCS makes much more money. Look at Wipro. Wipro makes maybe 30-40 percent less and look at the total compensation, the incentive. It is high, but the performance has got to be higher too. The company has missed numbers, the company’s plan needs to be improved. Q: Since you are talking about comparisons with peers, if you look at the performance comparison then at least in the period since Vishal Sikka took over, Infosys has actually performed better on several parameters and several metrics than TCS. Also it is a difficult environment, there has been a massive transformation that has taken place within the company. So, wouldn’t it be a bit unfair to say that performancewise they haven’t delivered because whether it is stock price, whether it is revenues, the company has done better since Vishal took over?A: I would advise you to look at the stock price in April 2011 and the stock price today in terms of market capitalisation. I would you urge you to see when Murthy stepped down what was the stock price and what is the stock price today. The share is about Rs 932, that is less than about Rs 3800 and how many years it has been there? What has been the stock price, what it has been in the industry, what has happened, you make a comparison.Q: After Murthy stepped down there was a period where SD Shibulal was guiding the company. So, why blame all of that now on Vishal Sikka?A: I am talking about the time after Murthy came back and Murthy stepped down, I am talking about that time. Let us go with data, the key issue is, you are paying a very high compensation to the CEO, the management teams compensation has gone up multi-fold in the last many years, what is the performance you are getting and what are the norms? I think it is the right question for people to ask. These are not ordinary compensations, it has gone up tremendously, it is the right question, there is nothing wrong in asking this question. I think people should ask this question. It is a public limited company, the founders are asking. It is not a reflection on the CEO. The CEO is a wonderful person.    Q: Shareholders have approved it, 98 percent of the shareholders have approved the compensation. You may ask the question but shareholders have approved the compensation.A: It is not 98 percent, that is misleading. It is 98 percent of the shareholders who came for the meeting. I don’t know how many people voted out of 100 percent and how many people came. So, 98 percent is wrong data. We should say 98 percent of the people who came there voted for that. Out of those 98 percent the founders owned maybe 40 percent. Just check and see how much of the voting came from the founders or they abstained, whatever it is, it is a very high figure, right?(Note: After the interview was published, Infosys has offered a clarification saying the vote "was a postal ballot and every shareholder had an opportunity to vote. 98 percent of shareholders who voted, were in favour of the resolution.)Q: You are saying the concerns are not so much about Vishal Sikka and his performance but on the manner in which you believe the board is discharging its responsibilities?A: Yes, that is what the founders have said, that is there in the letter. Infosys is not an ordinary company. The Infosys board cannot be an ordinary board. They have to perform at very high levels, expectations are high and governance standards should be kept at very high level. It is very difficult for them to come up to the performance the founders and other people who left the board because they have to step into big shoes.